Lack of evidence scuppers credit regulator bid against Finbond

Johannesburg – The National Consumer Tribunal (NCT) has dismissed an application by the National Credit Regulator (NCR) against Finbond Mutual Bank over excessive credit life insurance premiums.

According to the judgment by Professor Tanya Woker, the tribunal is unable to rule on the matter as there is no evidence to conclude that the insurance offered by Finbond through its agreement with Guardrisk Insurance is at an unreasonable rate.

In 2015, the NCR launched an investigation into Finbond, which provides credit life insurance to customers through Guardrisk. The decision was made as the NCR believed Finbond was charging customers excessive credit life insurance, and that the financial service provider failed to disclose the true extent of the commission paid to insurance company Guardrisk.

The NCR had received two emails stating that Finbond charged credit life insurance premiums of R56 and R57 per R1 000 granted to customers. Based on a sample of 11 customer files, the inspector concluded that an average insurance amount of R149 was payable per R1 000 for short-term and unsecured loans, compared to an average premium of R24.43 charged across the South African credit market.

Premiums "excessive" and "unreasonable"

According to NCR findings, this means that the premiums charged were excessive and at an unreasonable cost to consumers compared to other credit providers. 

The NCR further looked at Finbond's insurance loss ratio. This showed that for R56m insurance premiums written, payments of more than R1.7m were paid out. This showed Finbond’s consumers were not high risk.

The NCR wanted the tribunal to declare that unreasonable costs were charged to customers, and for Finbond to be “interdicted” or “restrained” in future for charging these excessive amounts. The NCR also sought to have Finbond pay an administrative penalty of R1m.

Finbond in turn responded by arguing that the based on two emails, the NCR did not have a reasonable suspicion that the financial services provider was engaged in prohibited conduct.

Also, the NCR had not consulted with Finbond on the matter before going to the tribunal. Finbond had expected the NCR to refer the matter to it for an explanation, before launching a formal investigation or referring the matter to the tribunal.

In its consideration, the tribunal noted that Finbond is not an insurance company and entered into a binary agreement with Guardrisk to provide credit life insurance. There was also no comparable evidence of other insurance companies in the same position as Guardrisk, making it difficult to conclude whether the credit life insurance it offers is unreasonable.

“It is very difficult for the tribunal to compare ‘apples with apples’,” the judgment read.

The tribunal also noted that the NCR relied “substantially” on the insurance loss ratio to demonstrate Finbond receives few claims in relation to the insurance premiums it receives. However, this information relates to Finbond, and not to Guardrisk. The insurance loss ratio of Guardrisk is applicable for this argument.

Based on this, the tribunal noted that Finbond is entitled to require its customers to have credit life insurance, through its agreement with Guardrisk. The insurance offered by Guardrisk must be compared to similar products that could be made available to Finbond through other insurers.

“It is only once it is established that the Respondent (Finbond) could have obtained similar insurance for its consumers from other insurers at a much more reasonable rate, that the Tribunal could be able to conclude that the insurance which the Respondent offers to its consumers is unreasonable,” the judgment read. 

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